Better off?


Are you better off now than you were however-many years ago?  It’s a classic political slogan, first used by Ronald Reagan in 1980.  The answer then was a pretty solid “No”.  Take it out of the cycle of elections and into the business cycle that we find ourselves in, however, and the course of action is not as clear as a political strategist might like.

One quarter into 2011 it’s time for a check-in on the economic front.  The news we’re likely to hear in coming months is likely to shift focus once again, moving from joblessness to the quality of jobs that people have right now and their ability to make ends meet.  It’s not likely to be pretty.

The focus on creating jobs, which was intense just a few months ago, has seen some remarkably good news.  We aren’t losing jobs rapidly any longer as initial unemployment claims have fallen to a 30-month low at the end of March.  There are many reasons for this, including more people who aren’t eligible for unemployment insurance when they lose a temporary job, but the improvement is significant.  It’s the first step towards increasing employment, and it’s a good one.

What comes next is the logical result of a long period of weak labor markets, namely that wages have been stagnant for a long time.  Combined with significant inflation in prices for food and energy and we have a situation where household income has fallen substantially.  This chart of Real (inflation adjusted) Median Household Income shows what has happened:
This graph, courtesy John Mauldin‘s excellent newsletter, is taken from Census Bureau data that is released each May.  It shows that the midpoint of all households is roughly as well off as it was 14 years ago – the boom of the 1990s essentially never happened.  When the report for 2010 comes out in a month we can expect that the sickening plunge over the last decade has probably worsened dramatically.  That will change the focus away from job creation and towards the plight of workers who already have jobs.

But wasn’t the big worry just a few months ago the potential for Deflation?  It was, and for good reasons.  The world has a large excess of manufacturing capacity, meaning there is downward pressure on prices for many consumer goods – and, as we can see, people do not have money to buy as much of them as they did in the past.  But energy prices, driven up in part by unrest in the Middle East and continued demand in the developing world, are offsetting this.  Corn prices have also increased, partly because a lot of corn is being used for fuel, raising food prices around the world.

There are two counter-forces right now that are working towards a balance.  One is the growth of the developing world, particularly South Asia, and the other is the ongoing maintenance of the developed world.  The focus is shifting from consumer goods to basic necessities as this takes place.

In short, the real problem is that the USofA does not have as much control over its own destiny as it is used to.  Years of public debt accumulation and completely out of whack trade are taking their toll.

While there is improvement all around there are still plenty of problem areas that require attention.  Job growth, while improving, is still nowhere near what is necessary to employ the next generation of workers.  Debt is a real issue in Washingtoon for the first time in a while, even if they are incapable of addressing it in a way that makes any sense.  Household income will be the next item to get a lot of attention as the focus shifts to the erasure of the gains of the last 14 years or more.

Are we better off now than we were some period of time ago?  The answer is no, we’re pretty much treading water at best.  But this has happened for some complicated reasons that require us to examine what is happening in a picture much bigger than ourselves.   Attention will continue to move from one issue to the next until we’re able to take that step back and realize what has been happening over the long term with the great and powerful nation that we inherited when we were born.